Stormy weather buffets Boral

Anyone expecting a sign from
Boral
yesterday that a turnaround was in sight would have been disappointed. But then, this is a stock priced for bad news, not good.

The short term horizon for Boral doesn’t look pretty.

While the market seems to think new chief executive
Mark Selway
has the smarts to turn Boral around, the building company hasn’t caught a break yet.

Exposed to inclement weather, sluggish consumer spending and the US housing sector, it does not have a lot of obvious near-term upside.

At yesterday’s annual general meeting, Selway saw no need to correct market expectations for full-year profit but warned it had been a “bumpy start to the year" because of continuing weakness in US housing and bad weather in Australia.due to the tough conditions in the US and “wetter than usual conditions holding back progress in many of in our key Australian markets

Australia had its wettest September in history and the third-wettest October on record, and meteorologists have predicted the La Nina weather pattern will mean above-average rain for another four months.

Rain is washing out the hopes for Boral in the domestic construction materials market as the demand side has been crimped by four rises in the official interest rate this year.

Tuesday’s surprise increase in the overnight cash target rate to 4.75 per cent from 4.5 per cent is likely to put the already shaky building market on an even less solid footing.

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Earlier this week, the Australian Bureau of Statistics reported a fall in approvals for new dwellings to be built for the sixth consecutive month in September.

Total dwellings approved fell by 6.6 per cent, including a 15.7 per cent drop in apartments and townhouses.

The number of houses approved fell by 2.2 per cent, the fourth consecutive fall.

Australia doesn’t look flash, but the real problem lies in the US, where Boral has previously made hundreds of millions of dollars in profits and is now making a loss.

Since coming on board earlier this year, Selway has been busily rolling out his lean management system aimed at cutting costs and adding value from the top of the company to the bottom.

But until the market returns and orders start rolling in, even a leaner US business is not going to return to profit.

On a positive note, the stronger Australian dollar reduces the impact of the losses it is incurring in the US. The stronger dollar is also reducing the cost of its US dollar borrowings.

According to Selway, the US market remains “difficult". The company has shuttered underperforming units and after that restructure managed 21¢ earnings per share on continuing operations last year, compared with rivals such as James Hardie, which suffered a drop in basic EPS to a 20¢ loss last year, or US giant Cemex, which managed EPS on continuing operations of 21¢ per share in 2009. Boral is trading on 17.23 times forecast earnings, compared with James Hardie on estimated P/E of 19.64.

So does this mean all bad news for Boral investors?

Well that depends two factors: the price they bought in; and their view on the US housing market.

Many investors believe Boral’s share price factors in all the bad news, and none of the potential upside from the eventual return of the US housing market.

The removal of a first-home owner tax credit in the US at the end of April triggered a horror trading period for Boral in May and June, but since then US housing starts have increased to an annual rate of about 600,000.

That’s still less than a third of that achieved during the boom years and less than half the long-term average of 1.5 million.

Boral doesn’t need another boom, just a return to the US long-term average before the dollars start rolling in again.

Given the capital-intensive nature of the US business, any incremental housing start increases over and beyond its cost of capital leads to very high margins.

Selway has also been focused on reducing the number of US housing starts it needs to make a profit,

Boral is basically a major leverage play on the US housing market. What investors in Australia and in the US are yet to decide is whether the US housing market is a decade-long turnaround story, or whether the good news will start much sooner.